A “silver lining” for entrepreneurs?

A new study shows that bear markets and recessions can actually be good times to start a new company.

The report, produced by U.S.-based entrepreneurial think-tank the Kauffman Foundation, suggests that despite the widespread pain felt during tough economic times, an “entrepreneurial silver lining” can encourage long-term business growth and job creation.

But why do startups appear to fare better during tough economic times?

One explanation is that recessions and bear markets actually present valuable business opportunities for entrepreneurs, who tend to be influenced more by their own instincts than by the economic climate at large.

“A downturn might actually act as an extra spur to founding a new company, if the founders perceive that their prospective competition might be weakened,” the report states.

Rising unemployment during a recession also frees up a bigger portion of the workforce, leaving more people (some with generous severance payments) to start new businesses and more potential employees to be snapped up by new companies.

As such, small businesses can actually serve as an engine of job creation during a recession.

Of course, there’s still the issue of external funding, which often tightens along with the economy during a downturn. But, as the report points out, many startups don’t seek significant growth right away and can forgo efforts to secure funding until after it loosens up again in good times.

“A supressed financial climate may be less immediately relevant to a person’s propensity to found a new company versus the person’s later ability to grow the company,” the study states.

As a recent report in The Economist illustrates, there is good reason to believe firms that emerge successfully out of a recession or economic crisis often turn out to be some of the strongest.

“During a boom, people will buy stuff without much thought. During bad times, they are much choosier. So only firms with genuinely superior products or services will thrive,” William Barnett, a professor at Stanford University’s business school, told the magazine.

I think this is very true and we’ve been experiencing this ourselves. Whilst no-one likes a recession we’ve managed solid growth throughout it, small businesses can be very agile and tend to be more resource conscious anyway so can survive very well.